1st Global, Inc. v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas, and Ken Paxton, Attorney General of the State of Texas ( 2021 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-19-00740-CV
1st Global, Inc., Appellant
v.
Glenn Hegar, Comptroller of Public Accounts of the State of Texas, and Ken Paxton,
Attorney General of the State of Texas, Appellees
FROM THE 53RD DISTRICT COURT OF TRAVIS COUNTY
NO. D-1-GN-18-003916, THE HONORABLE DUSTIN M. HOWELL, JUDGE PRESIDING
DISSENTING OPINION
I respectfully dissent. I disagree with the Court’s conclusion that the phrase “the
amount claimed by the state” in Section 112.051(a) of the Tax Code does not include the franchise
tax owed to the state that is calculated each year by taxable entities and must be paid with their
regular annual report by May 15. Instead, I would conclude that the phrase unambiguously
includes the franchise-tax amount that the Tax Code imposes annually “on each taxable entity that
does business in this state or that is chartered in this state” and that the Code requires to be paid
on May 15 each year. Tex. Tax Code §§ 171.001(a) (imposing tax), .152(c) (establishing date
upon which payment is due). Failure to timely pay this mandatory self-assessed tax amount and
submit the required annual report can result in a corporation’s loss of corporate privileges, as well
as penalties for delinquent taxes and other enforcement actions. Id. §§ 171.152(c), .202(a)-(b)
(requiring filing of annual report on forms supplied by Comptroller), .251 (providing that
Comptroller shall forfeit corporate privileges of corporation if corporation does not file report and
pay tax after receiving notice of forfeiture), .362 (establishing penalties for failure to pay tax when
due and payable or to file report when due); see generally id. §§ 171.351-363 (Subchapter H,
Enforcement). Consequently, considering the statutory language in the context of the entire Tax
Code as we must, see TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432, 439 (Tex. 2011),
I would conclude that the Comptroller, acting on behalf of the State, “claims” that taxable entities
owe the State franchise taxes to be paid each year in the amount prescribed by the Tax Code, and
thus a taxable entity may file a protest letter with its annual report challenging any portion of that
amount owed that it contends is unlawful. Accordingly, I dissent from the Court’s holding that a
taxpayer can never pay under protest its annual self-assessed franchise-tax amount due on May 15
and then later file a protest suit.
The Comptroller asserts that “protest suits are reserved for those who[m] the
Comptroller has demanded to pay a specific amount” and that the only remedy now available to
1st Global is to request a refund of the amounts at issue and proceed with an administrative hearing
for Tax Report Year 2018, see Tex. Tax Code § 111.104 (authorizing refund claim), to be followed
by a refund suit if it were dissatisfied with the outcome of that proceeding, see id. § 112.151
(allowing suit after denial of refund request). The Court agrees, and it holds that until the
Comptroller reviews an annual report and assesses a liability, conducts an audit, issues a jeopardy
determination, determines a deficiency, or issues a refund denial for 2018, 1st Global cannot
challenge the lawfulness of the tax. (Slip op. at 6-7.) However, the Texas Legislature chose not
to limit the broad language—“the amount claimed by the state”—to an amount that the
Comptroller calculates that a particular taxpayer has underpaid on the original “amount claimed
by the state.” If the Legislature had sought to limit protest suits to situations in which the
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Comptroller assesses a liability, conducts an audit, issues a jeopardy determination, determines a
deficiency, or issues a refund denial, as the Comptroller contends and the Court now holds, the
Legislature would have included language specifying that protest suits are limited to those
circumstances. See TGS-NOPEC, 340 S.W.3d at 439 (noting that courts presume the Legislature
carefully chooses a statute’s language, “purposefully omitting words not chosen”).
While it is true that protest suits are most often filed after the Comptroller takes
some action to inform a taxpayer that it has underpaid the amount claimed by the state, the statutory
language does not limit a taxpayer’s ability to file a protest suit to only those situations. The
Comptroller asserts that if a taxpayer has reason to believe that the Comptroller will disagree with
the taxpayer about the amount that the taxpayer owes, the taxpayer has only two options. The first
option is to pay the amount it would owe under the Comptroller’s position, request a refund of the
amount it believes to be unlawful, request a hearing if the Comptroller denies its refund request,
and once its administrative remedies are exhausted, file a refund suit. See Tex. Tax Code
§§ 111.104 (allowing refund claims), .105 (allowing taxpayer to request hearing if Comptroller
denies refund claim), 112.151 (allowing taxpayer to file refund suit after exhaustion of
administrative remedies). The taxpayer’s second option is to pay only the amount it believes it
owes and wait for the Comptroller to perform an audit or review the report, assess the taxpayer’s
additional liability for the disputed amount, and issue a deficiency determination or a jeopardy
determination, at which point the taxpayer can pay the amount under protest and file a protest suit.
See id. §§ 111.004 (providing Comptroller with power to examine books and records necessary
for conducting examination), .0043 (detailing general audit and prehearing powers), .008
(establishing that Comptroller may compute and determine amount of tax to be paid if he “is not
satisfied with a tax report or the amount of the tax required to be paid to the state by a person” and
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then must provide notice of deficiency determination to taxpayer), .009 (requiring petition for
redetermination to be filed before expiration of 60 days after date notice of determination is issued
and allowing taxpayer to request hearing and file motion for rehearing if dissatisfied with
Comptroller’s decision on motion for redetermination), .022 (establishing that Comptroller shall
issue jeopardy determination stating amount due and that tax collection is in jeopardy if he believes
collection of tax required to be paid to state or amount due for tax period is jeopardized by delay
and further establishing that jeopardy-determination amount becomes due and payable
immediately), 112.052 (allowing suit to recover tax paid under protest). Under the second option,
the taxpayer is liable for interest and penalties. See id. §§ 111.060 (establishing that yearly interest
rate on all delinquent taxes is prime rate plus one percent and that delinquent taxes draw interest
beginning 60 days after due date), .061 (imposing penalty of at least 5% of tax due on person who
fails to pay tax imposed or file report required by Title 2, e.g., franchise tax, when due).
The history of 1st Global’s engagement with the Comptroller illustrates why, under
the particular circumstances present here, a taxpayer should be able to protest with payment the
annual amount of franchise taxes owed and not be required to wait for a review or an audit followed
by an assessment or a jeopardy or deficiency determination from the Comptroller. The unusual
situation present here also illustrates why most taxpayers are unlikely to take the step that 1st
Global has taken of initiating litigation with the Comptroller, which means this construction of the
statutory language would not result in a sudden abundance of such suits, as the
Comptroller implies.
The underlying dispute between 1st Global and the Comptroller began in 2012
when 1st Global’s CPAs reviewed 1st Global’s annual tax reports for 2008, 2009, 2010, and 2011
and discovered that 1st Global had apportioned revenue by its out-of-state financial advisors to
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Texas. 1st Global then filed amended tax reports correcting the error and sought refunds for the
franchise taxes that 1st Global believed it had overpaid. The Comptroller audited the amended
annual reports. Two years later, in 2014, the Comptroller denied 1st Global’s refund requests. In
response, 1st Global timely filed formal refund claims for all four years, seeking to recover
$503,846 in overpaid tax, and requested a refund hearing to contest the Comptroller’s position.
1st Global subsequently requested status updates and resolution eighteen times. In his Tax Position
Letter and in his Response to Interrogatories served in connection with the administrative
proceedings, the Comptroller has stated that 1st Global must calculate its Texas franchise-tax
liability by apportioning all of its revenues at issue to Texas. Seven years later, 1st Global’s refund
claims are still pending before the Comptroller.
Between 2012 and 2016, 1st Global filed its report and paid the amount that it
calculated was owed, using the apportionment method that it asserts is the correct one. Had the
Comptroller audited 1st Global and issued a tax assessment for those years, then 1st Global could
have paid the amount under protest and filed its protest suit in district court. The Comptroller has
not done so. However, as 1st Global pointed out at the hearing on the plea to the jurisdiction,
because the difference between the tax owed under 1st Global’s apportionment method and the tax
it would owe under the Comptroller’s method is more than 25%, there is no statute of limitations
that establishes a deadline by which the Comptroller must audit its report. See id. § 111.205(b)
(providing that four-year statute of limitation established in Section 111.201 does not apply and
Comptroller may assess tax imposed by Title 2 at any time if information contained in report
contains “gross” error, defined as underpayment of at least 25%). Thus, 1st Global must carry on
its books the liability of potential taxes, interest, and penalties that goes back almost ten years with
no potential ending date.
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Faced with this large and annually growing liability, which affects its ability to
make business decisions, 1st Global determined in 2017 that under the plain language of the Tax
Code, it could pay under protest the amount claimed by the State and file suit. It did so, but this
Court dismissed that suit because we determined that 1st Global had not timely filed its protest
statement because it filed the statement with its later-filed franchise-tax report instead of filing it
when an extension of time to file its report was requested and payment was made. 1 See Hegar
v. 1st Glob., Inc., No. 03-18-00411-CV, 2019 WL 6765754, at *5 (Tex. App.—Austin Dec. 12,
2019, no pet.) (mem. op.) (“1st Global I”) (reversing trial court’s denial of Comptroller’s motion
to dismiss and rendering judgment dismissing 1st Global’s protest suit because we determined that
exception allowing later filing applied only to smaller taxpayers).
We explained in 1st Global I that our construction of the relevant statutes and rules
to require a larger taxpayer like 1st Global to file its protest letter at the time it seeks an extension
to file its report comports with both the statutory language and the Legislature’s purpose in
providing for both protest and refund suits:
A protest suit is intended to “provide an adequate legal remedy whereby a taxpayer
may test the validity of a tax without having to resort to the traditional equitable
remedy of injunction, which would restrain the state’s collection of the tax and
disrupt the tax-collection process,” while a refund suit allows the Comptroller “to
refund the payment of certain taxes found to have been paid through mistake of fact
1 After 1st Global filed its protest suit in October 2017, the Comptroller abated the
administrative proceedings for Report Years 2008 through 2011 “[t]o avoid the possibility of the
administrative body and the courts arriving at inconsistent decisions on the same question.” At
the time the suit was abated, the Tax Division’s Reply to 1st Global’s Amended Response to the
Tax Division’s Position Letter was the next procedural step that was supposed to occur. Because
the suit underlying this appeal was filed before the 2017 suit was dismissed, the Comptroller never
lifted the abatement. The Comptroller asserts in his brief that he offered to lift the abatement and
proceed with 1st Global’s administrative hearing after the hearing on the plea to the jurisdiction in
this suit, but that 1st Global never responded when the Comptroller “attempted to lift the stay by
agreement.” 1st Global replies that it never requested an abatement and that it “would like the
Comptroller to resolve its 2008-2011 administrative claims post haste.”
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or law, thereby relieving the legislature of time-consuming claims made directly to
lawmakers.”
Id. (quoting Strayhorn v. Lexington Ins., 128 S.W.3d 772, 779 n.9 (Tex. App.—Austin 2004),
aff’d, 209 S.W.3d 83 (Tex. 2006)). We further noted that “it is logical to conclude that a taxpayer
of such a size that it has paid sufficient taxes in past years to fall within the [electronic funds
transfer] provisions of Subsection (e) will often know that it believes the franchise-tax framework
is invalid or does not apply at the time it seeks an extension to file its report, as opposed to [filing]
a later refund request that contests the amount of taxes assessed by the Comptroller based on the
taxpayer’s franchise-tax report” and that 1st Global knew the grounds for its protest because it had
pending requests for refunds from past years. Id. & n.7.
In 2018, 1st Global submitted a protest letter with the payment it made on May 15
to extend its deadline to file its regular annual report and submitted the letter again on July 16
when it filed its report and the remainder of the payment claimed by the State based on 1st Global’s
regular annual report. 1st Global paid under protest a total of $184,912 in franchise taxes for
Report Year 2018 and seeks recovery of $123,205. In response to 1st Global’s requests for
disclosure, the Comptroller reiterated that he maintains his position expressed in the 2008-2011
administrative proceedings that 1st Global should apportion its revenue to Texas because its
revenue is created by its performance of services at its Dallas office. It is difficult to square the
Comptroller’s argument that 1st Global’s suit should be dismissed because “no amount has been
claimed by the state” with his continued position that 1st Global should apportion its revenue as it
did in its 2018 regular annual report; that is, all of its receipts should be apportioned to Texas
regardless of where its financial advisors provided their services.
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Furthermore, even under the Court’s proposed construction of the statutory
language, as the Court points out in its opinion, in this specific case, the Comptroller has already
made a claim:
The underlying dispute between 1st Global and the Comptroller goes back several
years and involves how 1st Global’s gross receipts should be apportioned for
franchise-tax purposes. Under the Texas Tax Code, apportionment of taxable
margin is based on a taxable entity’s “business done in this state.” Tex. Tax Code
§ 171.103(a)(2). In a separate administrative proceeding involving 1st Global,
the Comptroller previously announced his position that receipts generated
through the provision of services by 1st Global’s financial advisors, wherever
they are located, should all be apportioned to Texas because of its Dallas office.
1st Global, on the other hand, asserts that it earns its revenues in the states where
its advisors perform services on its behalf, which would result in its owing
substantially less franchise taxes to the State of Texas.
(Slip op. at 2) (emphasis added). The Comptroller continues to assert his position in this litigation,
meaning that he “claims” that 1st Global’s 2018 franchise tax should be calculated the way that
1st Global calculated it.
Most importantly, however, in my view, the plain language of Section 112.051(a)
provides a taxpayer with a third option for challenging a tax that it believes is unlawful: paying
the amount of its self-assessed franchise-tax liability under protest with its timely filed regular
annual report. The Texas Supreme Court explicitly recognized the validity of this option when it
allowed a taxpayer’s second suit challenging the franchise tax as unconstitutional to proceed after
dismissing the taxpayer’s first suit for want of jurisdiction because the taxpayer had failed to
comply with the statutory prerequisite of first paying the tax under protest. Compare In re Nestle
USA, Inc., 387 S.W.3d 610, 616 (Tex. 2012) (orig. proceeding) (“In re Nestle II”) (explaining that
in prior suit, supreme court “held that payment under protest was a jurisdictional prerequisite to
[taxpayer’s] challenge and dismissed the proceeding. Nestle then paid the $8,682,999 due for 2012
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under protest and re-filed its challenge.”), with In re Nestle USA, Inc., 359 S.W.3d 207, 208-10
(Tex. 2012) (orig. proceeding) (“In re Nestle I”) (dismissing taxpayer’s first suit for want of
jurisdiction). Contrary to the Court’s conclusion that the supreme court’s decision in In re Nestle
II does not constitute “an affirmative and authoritative decision” on this jurisdictional issue
because it was neither raised by the parties nor discussed in the court’s opinion, the supreme court
considered precisely the issue of whether a taxpayer could file a protest suit after paying its self-
assessed tax under protest in In re Nestle I. The fact that no one raised the issue of whether that
self-assessed tax was an “amount claimed by the state” speaks to the unambiguous nature of the
phrase. And although the Comptroller attempts to distinguish the Nestle cases because the
taxpayer there sought to challenge the constitutionality of the franchise tax rather than the legality
of the Comptroller’s position on how the taxpayer should calculate the amount of tax due on its
report, in effect arguing that a taxpayer can pay under protest with its annual report only if it intends
to challenge the entire amount of tax due rather than some portion of the tax, there is no such
limitation present in Section 112.051(a). 2
Because I would conclude that 1st Global has complied with the statutory
prerequisite to establish a waiver of sovereign immunity by timely paying “the amount claimed by
the state” under protest, I respectfully dissent.
2 If this were true, Section 112.051(a) also would allow a taxpayer to challenge only the
entire amount of tax due when filing a protest suit after an assessment, a deficiency or jeopardy
determination, or a denied refund claim, but there is no statutory language in Section 112.051(a)
indicating that the Legislature intended such a result. Indeed, because the protest statement must
set forth each reason for recovering the payment, and because the issues in the suit are limited to
those issues arising from the reasons expressed in the written protest, the statutory scheme
contemplates that a taxpayer may seek recovery for only some portions of the tax paid if it
challenges only some parts of how the tax is calculated by the Comptroller. See Tex. Tax Code
§§ 152.051(b), .053(b).
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__________________________________________
Gisela D. Triana, Justice
Before Justices Baker, Triana, and Jones*
Filed: October 29, 2021
*Before J. Woodfin Jones, Chief Justice (Retired), Third Court of Appeals, sitting by assignment.
See Tex. Gov’t Code § 74.003(b).
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